The Tax Court agreed with the IRS in a recent case that the one-rollover-per-year rule applies to all of a person’s IRAs, not to each of his IRAs separately. What is curious is that the IRS’s position in this case and the court’s holding are contrary to an IRS publication and at least one private letter ruling.
During 2008, Alvan Bobrow requested and received a distribution from his traditional IRA. Later, he received a distribution from his rollover IRA. Within 60 days of each distribution, Alvan replaced the funds in the IRA accounts.
The Tax Court ruled in favor of the IRS, saying that the distribution from the rollover IRA was taxable because Alvan failed the one-rollover-per-year rule. The court said that the plain language of the tax code limits the frequency of nontaxable rollovers a taxpayer may elect. By its terms, the one-year limitation is not specific to any single IRA maintained by an individual but instead applies to all IRAs maintained by a taxpayer. The court also upheld the IRS’s assessment of the accuracy-related penalty (Alvan J. and Elisa Bobrow v. Commissioner, TC Memo 2014-21, Jan. 28, 2014).
The IRS position and the court’s holding are at odds with the IRS position in IRS Publication 590, Individual Retirement Arrangements, and in Private Letter Ruling 8731041.
“Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover,” according to Publication 590.
Publication 590 contains the following example:
Illustration: A taxpayer we’ll call Chris has two traditional IRAs (IRA-1 and IRA-2). On Date 1, Chris makes a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Chris cannot, within one year of Date 1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. However, Chris can make a tax-free rollover from IRA-2 into any other traditional IRA because Chris has not, within the last year, rolled over, tax free, any distribution from or made a tax-free rollover to IRA-2.
Neither the courts nor the IRS are bound by positions stated in IRS publications or tax form instructions. And only the taxpayer who receives a private letter ruling may rely on the conclusions expressed in it. The court in Bobrow did not address IRS Publication 590 or the private letter ruling.